Tuesday 26 October 2010

3 reasons why 3x Tesco Clubcard Deals will work


Just over a year ago I wrote about how Tesco had introduced double points to the hugely popular Clubcard scheme, making it far more rewarding and really capturing peoples attention at a time when they were increasingly evaluating their retail choices.

Those in the industry questioned how long they could continue to offer double points given the cost of it and so thought it a short term promotional campaign rather than a longer term programme change. Now, 12 months later, we have the answer - it was both.

From the 6th December the Clubcard scheme is changing again, however it's not double points which are going, it's the 4x Clubcard Deals. Tescos state:-

We've decided to keep double points going, because it has been so popular and has made a real difference to how much value we've given to customers. So, your shopping will earn you twice as many points (especially useful when you do your Christmas shopping!) which means twice as much value back in your next statement.

It would be easy to be cynical about this and suggest that as they give with one hand they take with another. However while the scheme value will drop from the current high that the double points promotion brings, this is not a scheme devaluation. By keeping double points going and at the same time dropping the Clubcard Deals from 4x to 3x value, the scheme is still more rewarding than it was 12 months ago - but only just.

The table below shows example spend levels for a customer who earns points across a number of different areas. Assuming they also use their Tesco Credit Card to buy their Tesco shopping and Fuel, they are still 15% better off under the new rules than before double points were introduced.

CategoryMonthly SpendOriginal SchemeDbl Pnts Promo3x Deals
Car Insurance£25£1.00£1.00£0.75
Credit Card£1,000£10.00£10.00£7.50
Total Reward

Of course, the current double points promotion has significantly increased the reward value for customers so there will inevitably be a big drop for many. If you look at this as just a promotion however, the Clubcard scheme still appears to be more rewarding.

So what is going on. Why have Tescos complicated things by essentially devaluing rewards and increasing earning simply for the scheme value to stand still?

My guess is this has been done for 3 reasons.

1. Rewards too good to be true - Customers don't trust promotions that give too much value. When testing points rewards, you typically get no additional lift moving from double to triple points and increasingly, as you lift the points value, you decrease participation. This is basically because customers begin to see the offer as being too good to be true and feel there is some other objective at play and so shy away. Ironically, in order to increase the take-up of Deals, Tesco may have had to reduce the offer to make it appear less appealing.

2. Partner Participation - The Clubcard Deals are fantastic value, but it is rumored that partners have to fund 50% of the value. With some partners like Legoland seeing an increasing number of customers using Deals vouchers to gain entry, I suspect it is becoming harder for Tesco to keep these partners engaged and to keep the offers open and free from restrictions. There is probably a gain in this programme change for partners as well, lowering their participation costs.

3. Two points is better than one - Customers don't "do the math" when looking at loyalty schemes, they simply compare one scheme to another based on the earning rate. If they get 2 points per £1 on Clubcard and only 1 point elsewhere it immediately feels more rewarding, regardless of the ultimate exchange rate. Tesco had previously tested giving 2% rather than 1% when first launching Clubcard and had seen no uplift in spend with the higher return. However, in a competitive market, this increased earn rate is probably doing a better job of attracting and retaining customers, even if it doesn't actually result in any more uplift. This was evidenced by Tesco managing to hold and slightly increase it's market share in a tough economic climate and taking share from ASDA who was fighting on everyday low prices and had previously shown signs of growth at the expense of Tesco.

It takes a lot to communicate changes like this to customers and causes potential confusion and re-evaluation. You can bet Tesco wouldn't be doing this if it wasn't going to result in a return.

What I think is great is that Tesco is not content to sit back and just go through the motions. They really want to sweat their loyalty scheme to get the most from it, even if this means making bold changes to keep it on track.

Loyalty is far from a commodity for Tesco - it still has the power to change the playing field.

Sunday 17 October 2010

Is US DoJ Lawsuit actually a win for MasterCard & Visa

Credit card loyalty programmes took a potential dent last week when Visa and MasterCard settled a dispute with the US Justice Department. The dispute centred around the restrictions the card schemes placed on retailers about card acceptance and how they are able to promote or incentivise different payment methods.

To accept Visa or MasterCard, retailers have to essentially sign up to an "honor all cards" commitment. In principle this rule is a good thing as it means that wherever you see the card scheme logo, you can be assured your card will be accepted. The problem however is that increasingly not all cards are equal.

Card schemes typically charge merchants a fee for every transaction which ranges anywhere from 1-3%. This interchange fee is the cost of doing business if you want to take credit cards and as a retailer you cannot impose a surcharge to cover it. This basically means that whether I pay using cash, debit or credit card, I should pay the same price.

While for the consumer these restrictions sound fair, what really niggles merchants is the fact that these fees are increasing. Card schemes are free to set the interchange rates at whatever level they want and increasingly they are charging more for "premium cards" and "reward cards".

Again the principle behind this seems fair - if you want to access a better class of customer who has more disposable income, you need to pay a little more for the privilege. The problem though is that increasingly the bar is being lowered for a "premium" customer meaning merchants pay more fees across more customers and don't necessarily get more benefits.

The retailers argument is that as they cannot surcharge for these cards or refuse to accept them they are essentially held hostage to whatever the card schemes want to charge.

This has now changed though. While the retailer still has to accept all cards within a given scheme they sign up to, they can now incentivise customers to use other payment methods including cheaper credit cards. This could mean for example that a customer may be offered a 2% discount for using a cheaper credit card or debit card, making them decide at the POS whether they want 2% off now or pay 2% extra and earn reward points.

The value exchange and payment decision is suddenly going to get very complicated.

However, it's not all that bleak. The Visa and MasterCard settlement is actually quite clever and probably more of a win for them than a loss.

The first rule of the proposed settlement states:-

[Allow merchants to] offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment

This means that the offer at POS will have to be something like "2% discount for using debit card" rather than a "2% charge for using rewards credit card".

Given that consumers will have already seen the price of goods published and will have been mentally prepared to pay that price, this I suspect won't have such a great effect. In addition, the amount of rebate that can be offered is also very small on a per transaction basis - anyone who's enrolled in a card reward scheme knows that you have to spend thousands to get a small amount back. On a $50 transaction, any free gift worth around $1 isn't going to be worth having - I'll just have the points thanks.

While larger merchants can probably combine this with their own loyalty scheme, offering say double points for transactions using a different payment card, it is likely that highly loyal customers already have the merchants own payment card - so little traction here either.

For smaller merchants this is likely to work even less. They are in a constant battle for customers against the larger retail behemoths and so unless you're the only merchant for miles, setting payment hurdles higher is likely to just make footfall lower. Their only saving grace is the proposed rule:-

[Allow merchants to] communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment

This tugging on the heart strings for a small mom and pop store is likely to be more motivating than any discount on other payment mechanisms.

Also, don't expect consumers to win in this deal any time soon. Attorney General Eric Holder said:-

We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anti-competitive rules, we will accomplish that.

However, any potential savings that retailers make out of this won't be passed on to the consumer in lower prices, they will simply go into greater profits for the retailer. The experience in Australia when they halved interchange fees showed that basically consumers get less rewards on the cards, pay more in bank fees and end up still paying the same price. While this settlement is slightly different, it certainly won't result in savings for consumers. If anything it will move money from consumers pockets in the form of points and into retailers pockets in the form of increased profits.

There is though I think a happy medium here.

For many merchants, especially the smaller ones, they don't have the ability to recognise and reward customers in a meaningful way either due to purchase frequency or the running costs around a loyalty solution. What this judgment does do is provide a wake-up call for banks that they cannot keep retailers at arms length and expect them to just payout for a loyalty programme which is basically there to create stickiness to the bank - not the retailer.

I think now is the time for banks to embrace retailers and provide added value back to them in return for accepting their cards. Banks have a wealth of data and very sophisticated loyalty platforms. The opportunity to create a win-win here for banks and retailers is immense and if the judgment delivers this it will have been worth it.

Sunday 3 October 2010

7 Principles of Loyalty

From time to time we're asked what makes a good loyalty proposition. Whilst each programme should be designed around the unique properties of a brand, it's customers and the relevant objectives, there are some common elements we use when thinking about different aspects of the programme.

1.Subscribe; not bribe – For people to feel motivated they should feel that they are making smart decisions. A loyalty programme should not appear as a bribe - something that would taint the brand - and instead should appear as added value which customers want to sign-up to.


As the book Scoring Points puts it, better a "chosen" than a "given", but it's also wider than this; not just about whether the customer has chosen it, but the customer also needs to feel chosen - they need to feel it's not a bribe. Within recognition for example, people are more motivated when recognised based on a stated behaviour they have exhibited rather than a one size fits all.

Nectar demonstrates this principle very well in it's latest innovation; their iPhone app. Customers are provided various points offers from Nectar partners, but rather than simply awarding these at POS when the customer makes a purchase, instead the customer has to say "I want it" - they have to subscribe to the offer; this ensures they value it more and that they see it as a smart choice.

2.Loyalty is a journey not a destination – A well designed loyalty programme is made up of many small individual behaviour changes which link together to create deeper engagement. The programme should make it clear what these behaviours are and look to encourage them through the reward and recognition design.

Increasingly, recognising wider interactions as part of this is becoming more important as it allows a programme to start the journey earlier in the buying decision process. When designing a programme, consider all elements of the customer journey, how to highlight and recognise these to customers and how to move people along and up using the tools within the programme.

3.Recognition: it’s own reward – Don’t underestimate the value of recognition in it’s own right. A simple “thank you” can be very powerful and for some the mere act of accumulating points can be motivating in itself. Harness all avenues to recognition including new forms that are coming out of the increasing trend of gamification within loyalty.

This can also provide a great way of engaging less frequent or less valuable customers by providing recognition as a reward in itself and not tied to expensive rewards which they cannot accumulate or access.

4.Show me the value – Customers need to see a value exchange; they need to understand that their activities are an integrated set of steps to a given goal and that this goal is achievable. However, don’t confuse value with money. Whilst monetary value is important, value can also be achieved through social currency and privilege.

Whilst highlighting to customers what rewards are acheivable, it's worth remembering that many customers will underestimate the amount they spend (and could spend) with you and so early on, rewards may look out of reach. Focus on the reward itself and what other people are achieving (social proof) and not simply on the cost.

5.Much cheaper to be relevant – Standard mantra for CRM programmes is Right Message, Right Time, Right Channel. This still holds true and behaviour change can be much more effective when the message is relevant.

The principle also applies within the programme design itself as designing a programme to acquire and retain the right customer segments can be much cheaper than a mass programme for all.

6. Facilitate (don't initiate) advocacy – Take every opportunity to turn the scheme inside out and make it social. Word of mouth is very powerful but it must be genuine and not purchased. Giving people ample opportunities to share means they actually will. With many retailers seeing traffic more than double with the integration of Facebook “Like”, this can be a very powerful mechanic.

Don't expect customers to simply share the scheme though - it's unlikely many customers will say "join this great loyalty programme". Instead, build in the ability to share achievements - whether this is a reward they have redeemed for, a purchase they've made or a tier/level they've obtained. People are more likely to share achievements and share them more regularly than they are to make formal recommendations.

7.Create reasons to stay (and stay loyal)– This is not about locking people in, but instead is about ensuring they understand the value they have (and will lose) if they leave. Points do this very well, with people building up deferred value they don’t want to lose. Many programmes also use recognition mechanics like tiering which help people to build up more invested value if they concentrate more of their purchases with the brand.

One area to watch out for though is a programme design which actually causes disloyalty. For example, if your tiering structure allows people to "top out" and the customer sees no benefit to continue, they will start to shop around to build up loyalty standing with other brands - essentially playing the tiering field.

Keep in mind that points and tiers are not the only tools for creating a sticky programme - privileges, social connections and content can also be very compelling, as can increased game playing elements like leader boards, levels and status.

I've no doubt people have their own versions of these principles - and additional ones that they use. Feel free to share and discuss.